The Dollar Is Heavy Ahead Of What Is Expected To Be A Dovish Fed

The US dollar had another rough week, and the poor close ahead of the weekend warns that the downside may not be exhausted.

Despite unmistakable signs that the US economy is accelerating, and by more than expected, the US 10-year yield is around 25 bp off the end of March high.  This seems to dampen the enthusiasm for holding the greenback (SPTL).  

The Federal Reserve meets next week and there is no compelling reason to expect a change in tone from either the statement or Chairman Powell's remarks.  The Fed has anticipated that the pace of activity and prices would pick up and they have.  We think as the economy continues to open up, and growth broadens and deepens, it will be increasingly difficult to justify the $120 bln a month in bond purchases.  Although it is not fully discounted, the market leans strongly toward a rate hike by the end of next year.  

Tactically, we had thought that there was still some life in the divergence meme that saw the dollar recover in Q1 after its losses accelerated in the last two months of 2020.  Strategically, we remain bears.  We continue to believe that the third large dollar rally since the end of Bretton Woods is over.  Also, the divergence meme that had helped the greenback offers only a temporary respite, as the slow vaccine rollout in the EU and Japan delays but does not negate their recoveries.  The combination of a large budget and trade deficit seems to require higher interest rate differentials to support the dollar.  Over the past month, the 10-year differentials have narrowed rather than widened.  

Dollar Index:  The third consecutive weekly decline has brought the Dollar Index to the 90.80 area, which corresponds to a (61.8%) retracement of the rally from the early January lows (~89.20).  A break of the 90.80 area signals a test on the 90.00-90.20 area before a return to the lows.  The MACD is still headed lower while the Slow Stochastic is trying to turn higher.  A close above 91.40 would help stabilize the technical tone (UDN).  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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